If you’re wondering whether there is demand for CAVA after its impressive June IPO, look no further than its first earnings report Tuesday after market. In summation, the Mediterranean restaurant concept experienced year-over-year revenue growth above 62% in Q2, driven by same-store sales growth exceeding 18%. Traffic was up by 10.3%.
“Becoming a public company was not the destination, but the beginning of the next chapter of our journey. CAVA is creating and defining the next cultural cuisine category, and our results in the second quarter of 2023 demonstrate the broad appeal of our innovative, authentic Mediterranean concept and the significant white space opportunity in front of us,” President/CEO Brett Schulman said during the call.
What does that white space look like exactly? In Q2, the company opened 16 net new restaurants and ended the quarter with 279 restaurants, a 43.1% increase year-over-year. The company is rapidly planting its flag in new markets, including Missouri and Rhode Island in Q2, and expects 65 to 70 net new units this year, with at least 15% growth in 2024 and 2025. Next year, the first CAVA will open in Chicago, establishing the brand in the Upper Midwest.
This growth is also driven by strong unit economics. During the call, CFO Tricia Tolivar said these metrics span every geography, as well as in suburban, urban, and specialty markets.
“Our overall AUV is now above $2.6 million. All geographies are over $2.2 million,” she said. “Restaurant-level profit was $44.6 million, or 26.1%, representing a 91.9% increase (to the prior year). The margin expansion was largely a result of sales leverage on labor and occupancy and improved food, beverage, and packaging costs. Our second-quarter profitability demonstrates the power of our business model.”
That said, she cautioned that the company does not expect to maintain this level of profit margin in the near term given its current stage of rapid growth and the investments such growth entails.
To support its ambitious expansion, for instance, CAVA is leveraging its digital capabilities, including a recently updated app with enhanced features such as reorders and save favorites, improved cart and payment functions and a faster experience. A new e-commerce site launched at the end of 2022, according to Shulman, and the company has completed a microservices initiative to support scalability.
“This flexible platform positions us for sustainable growth and our upfront investment will create leverage as we scale,” Shulman said. “We believe it’s an in-house digital platform few restaurants our size, much less many larger brands, have.”
CAVA is also in the process of updating its loyalty program and expects a launch in late 2024 with a market test expected later this year. Shulman said the program will have customer segmentation capabilities to personalize guest experiences.
“We see an opportunity to really evolve (the program) and build deeper, more meaningful connections with our guests, leverage all those users and create much greater value for them and our business utilizing the power of personalization,” Shulman said. “We’re building out the customer segmentation data work as a foundational piece to drive that unique personalization where we’re speaking to each of our guests based on their needs, their preferences, their profile in a very one-to-one way.”
Focus on GMs
In addition to its sharpened focus on digital initiatives, CAVA is also looking to its general managers to support its growth. Shulman said the company has a goal to internally promote 75% of its employees to GM and it is on pace to do so this year. Driving this metric is CAVA’s new Academy GM Network, identifying top performers who are certified to develop and train new GMs. By the end of this year, the company expects to have at least one Academy GM in each of its groups, which typically include eight restaurants.
“The network not only serves as a farm system for new restaurant GMs and future leaders, but also supports our work to minimize pre-opening costs by creating training hubs in growth markets,” Shulman said. “We plan to add 50 Academy GMs by the end of the year, allowing for localized training for new restaurants in all existing markets.”
The ‘Chipotle of Mediterranean’
Wall Street has strived to find similarities between CAVA and Chipotle since the former’s IPO earlier this summer. Both are company-owned fast casual concepts with very little categorical competition, for instance.
A few similarities emerged during the earnings call, as well. Firstly, Shulman talked at length about CAVA’s stage gate process to launch new menu items, the signature process of Chipotle’s menu launches. Schulman said his company has built a robust infrastructure for ideation, development, testing and launch of new items, including its new spicy falafel and fiery broccoli.
Also, Tolivar said the company now has more than 20 digital pickup lanes – similar to the Chipotlane – and said those units’ AUVs are 10%-to-15% higher than traditional restaurants.
“As we look at our pipeline of new restaurant openings, we anticipate that our drive-thru digital pickup lanes will be a larger portion of the portfolio,” she said, identifying another parallel.
Notably, when Chipotle went public in 2006, it had about 450 units. Now it has about 3,200 and is eyeing 7,000. CAVA is just under 300 and is aiming for 1,000 in less than 10 years.
“Our focus is on the long term and what we can do to remain the category-defining brand, execute on our proven portability and powerful unit economics, and really leverage that massive white space opportunity,” Tolivar said.
Contact Alicia Kelso at [email protected]